Nokia Siemens Networks will buy Motorola's telecom network equipment business for $1.2 billion, in an effort to add mew customers in markets such as Japan and North America where it has been seeking growth.
The idea is that a bigger Nokia Siemens Networks – a venture of Nokia and Siemens – would compete better than either company could have alone against rivals Sweden's Ericsson, China's Huawei and France's Alcatel-Lucent.
Motorola and NSN have had a hard time battling bigger players to win business with large telephone companies in the cut-throat mobile gear market, which is expected by analysts to decline this year.
RBC Capital analyst Mark Sue said while the sale price was much lower than his expectation for a $2 billion to $3 billion deal, it still made sense for Motorola to sell the assets.
“It's one of those things they had to do. They're too small to have a serious impact on the carrier market and it's a declining business longer term,” he said.
Motorola shares were up 26 cents or 3.47% at $7.76 in afternoon trading on the New York Stock Exchange where Nokia's US shares were up 7 cents, or 0.8%.
After the deal, which is expected to close later this year, Motorola plans to split into two entities, one of which will include its mobile phone and set-top box business. The other business, which was previously to include network equipment, will now focus entirely on selling wireless technology to companies and clients such as public safety organizations.
Under the deal, Motorola, which brought in $3.7 billion revenue from network equipment last year, will still keep its network technology patents, which Nokia Siemens can use through a cross-licensing agreement.
Motorola will also keep its i-Den network gear business that supports an older Sprint Nextel network and brought in roughly $400 million of its 2009 network revenue.
Nokia Siemens and Motorola said they were also exploring a relationship between Motorola's public safety business and NSN's commercial business that sells next generation technology Long-Term Evolution.
Nokia Siemens Networks said it expects the deal to give it relationships with more than 50 telecom operators and to strengthen its position with major carriers like China Mobile, Clearwire, KDDI, Sprint, Verizon Wireless and Vodafone.
Nokia Siemens Networks, which plans to finance the deal from its existing reserves and financing agreements, has struggled to make a profit in the $82 billion market, which was hit hard by the recession.
But under Chief Executive Rajeev Suri the group has started to seek growth more aggressively and fight back against market leader Ericsson and Huawei, its most aggressive competitors.
Motorola's mobile network business controls just 3% of the global market, but it is a market leader in high-speed technology WiMax, and has a strong footprint in CDMA technology, which is used in the United States.
“The acquisition is timely given Nokia Siemens' ambition to grow its revenues in North America,” said Paolo Pescatore, an analyst with British consultancy CCS Insight.
This deal makes Nokia Siemens the third-largest player in North America after Ericsson and Alcatel-Lucent.
Nokia Siemens tried to build a position in North America through an acquisition last year, but lost out on two major auctions of assets from bankrupt Canadian rival Nortel: first to Ericsson and then to Ciena Corp.
Both companies paid 0.57 times annual revenues for the Nortel business units. Nokia Siemens is paying 0.32 times annual revenues of $3.7 billion at the acquired Motorola business.
Some analysts questioned the deal due to Motorola's tiny 3% global market share and due to tricky integration of 7,500 Motorola staff and multiple product lines.
“It is a desperate attempt to gain market share in the US after the twice failed attempts to buy Nortel's CDMA and Metro Ethernet businesses,” said Earl Lum, founder and chief of industry research company EJL Wireless.
“The integration of the personnel and the manufacturing facilities and supply chain will prove to be challenging in addition to the differences in corporate cultures,” he said.
Nokia Siemens has struggled to take a larger share of North American business on its own. Revenues shrank 9% in the first quarter to €153 million ($198.5 million), making up just 6% of the group total.
In contrast, Ericsson generated revenue of 9.5 billion Swedish crowns ($1.3 billion) in North America the same quarter, 21% of the group total, helped by its Nortel asset buy.
Market research firm Gartner predicts the overall market will shrink 2% this year after a 7% fall in 2009, and even the most optimistic industry players see only slight growth ahead.
Smaller vendors, like Motorola, have already focused on picking a limited number of deals and technologies they can succeed in – especially after Canada's Nortel filed for bankruptcy last year. (Reuters)